Tuesday, March 8, 2011


Using stock market data as his main research tool, Elliott discovered that the ever-changing path of stock market prices reveals a structural design that in turn reflects a basic harmony found in nature.
--R.N. Elliott

/ES 61.8% Fibonacci Retracement

I wonder what was going to happen during Market Hours...Hmmm

/ES Fibonacci 261.8% Butterfly

Following the completion of the 161.8% move up from the summer (previous posts), the /ES gapped lower on Tuesday's open following President's Day. The first retracement up started after hours Tuesday to open at 61.8%(Red) Wednesday. This led to a 161.8%(Green) bar on the wick near the close that afternoon. The next retracement up came only to 38.2%(Gold) during the premarket hours, which led to the 261.8%(Green) bar on the wick near the close that afternoon. This could have been traded for the bounce up that followed, but had to be exited quickly as it failed to break the prior support at 161.8%(Green), and it resumed the down move closing once again near the 261.8%(Green). This filling action, twice at 261.8%, allowed for a stronger retracement up that eclipsed the 78.6%(Magenta) level of the entire move down. This move up opened Friday at the 161.8%(Green) acting this time as support and giving it a lift. Going forward, the retracement up that broke the 78.6% was after hours, but it never broke the first 61.8%(Red) retracement or the 78.6%(Magenta) during open market trading. This failure prompted the move back down and now blasted down through the 161.8%(Green) level to find support once again at 261.8%(Green). Once again we approached 161.8%(Green) from the bottom failing numerous times. After hours it traded above 161.8%, fell back and found support that sprung it higher into the open Thursday. It could not get beyond the 78.6%(Magenta) or 61.8%(Red) during open market hours. After the close, it tried numerous times to stay above those levels only to continually fail and open below both Friday never looking back. Another fierce down day occured, where once more it found support near the close at that key 161.8%(Green) level, while having traded above it on its descent Friday. There have been several retracements inside of these and I have done my best to document them in other posts, but it is fascinating how accurate the initial Fibonacci retracements drawn on the first move down have been in determining support and resistance going forward. It gives yet even more credence to the 61.8% Fibonacci Extension from 3/09/10 that ShadowTrader pointed out as well as the 161.8% Level from the 38.2% Retracement over the summer, 2010(see previous posts). The close on February 15, 2011 was a major cyclical turning point! This has been some great trading!!

/ES 78.6% Retracement = ...

Sunday, March 6, 2011

/ES 78.6% Fibonacci Retracement

Convergence of Fibonacci 161.8% Retracement & 61.8% Extension

With the convergence of these two Fibonacci levels I had no doubt the market would turn lower following the action Friday, February 18. The 161.8% level up from the 38.6% retracement during the summer gave a strong inclination of the end of a move. Our friends over at ShadowTrader pointed out the 61.8% level of the Fibonacci Extension over a week prior to the run up. They also pointed out the strong inclination of the overall market to turn at those levels. With both of these occuring at the same price it was time to load the boat with put options and more conservatively put spreads. This was a fantastic trade over the next few days with the /ES futures gapping lower from Friday and starting the short week after President's Day substantially lower. We were able to take profits on the down trend both Tuesday and Wednesday. The trade continued in our favor as Thursday the /ES retraced up 78.6% only to gap lower on the next day. This will be shown in more detail in the next post.

Phi (3of3)

Elliott, in his second monograph, used the title Nature's Law — The Secret of the Universe in preference to "The Wave Principle" and applied it to all sorts of human activity. Elliott may have gone too far in saying that the Wave Principle was the secret of the universe, as nature appears to have created numerous forms and processes, not just one simple design. Nevertheless, some of history's greatest scientists, mentioned earlier, would probably have agreed with Elliott's formulation. At minimum, it is credible to say that the Wave Principle is one of the most important secrets of the universe. Even this grandiose claim at first may appear to be only so much tall talk to practically-minded investors, and quite understandably so. The grand nature of the concept stretches the imagination and confounds the intellect, while its applicability is as yet unclear. First we must ask, can we both theorize and observe that there is indeed a principle that operates on the same mathematical basis in the heavens and earth as it does in the stock market?
The answer is yes. The stock market has the very same mathematical base as do these natural phenomena. The idealized Elliott concept of the progression of the stock market is an excellent base from which to construct the Golden Spiral, as Figure 3-10 illustrates with a rough approximation. In this construction, the top of each successive wave of higher degree is the touch point of the logarithmic expansion.
This result is possible because at every degree of stock market activity, a bull market subdivides into five waves and a bear market subdivides into three waves, giving us the 5-3 relationship that is the mathematical basis of the Elliott Wave Principle. We can generate the complete Fibonacci sequence, as we first did in Figure 1-4, by using Elliott's concept of the progression of the market. If we start with the simplest expression of the concept of a bear swing, we get one straight line decline. A bull swing, in its simplest form, is one straight line advance. A complete cycle is two lines. In the next degree of complexity, the corresponding numbers are 3, 5 and 8. As illustrated in Figure 3-11, this sequence can be taken to infinity.
((9.3 Phi and Elliott, "Elliott Wave Lessons 10"))

Phi (2of3)

Consider when reading such deep yet vague descriptions that these people could not clearly see what they sensed. They did not have graphs and the Wave Principle to make nature's growth pattern manifest and were doing the best they could to describe an organizational principle that they discerned as shaping the natural world. If these ancient philosophers were right that a universal structural force governs and permeates the world, should it not govern and permeate the world of man? If forms throughout the universe, including man's body, brain and DNA, reflect the form of phi, might man's activities reflect it as well? If phi is the life-force in the universe, might it be the impulse behind the progress in man's productive capacity? If phi is a symbol of the creative function, might it govern the creative activity of man? If man's progress is based upon production and reproduction "in an endless series," is it not reasonable that such progress has the spiraling form of phi, and that this form is discernible in the movement of the valuation of his productive capacity, i.e., the stock market? Just as the initiated Egyptians learned the hidden truths of order and growth in the universe behind the apparent randomness and chaos (something that modern "chaos theory" has finally rediscovered in the 1980s), so the stock market, in our opinion, can be understood properly if it is taken for what it is rather than for what it crudely appears to be upon cursory consideration. The stock market is not a random, formless mess reacting to current news events but a remarkably precise recording of the formal structure of the progress of man.
Compare this concept with astronomer William Kingsland's words in The Great Pyramid in Fact and in Theory that Egyptian astronomy/astrology was a "profoundly esoteric science connected with the great cycles of man's evolution." The Wave Principle explains the great cycles of man's evolution and reveals how and why they unfold as they do. Moreover, it encompasses micro as well as macro scales, all of which are based upon a paradoxical principle of dynamism and variation within an unaltered form.
It is this form that gives structure and unity to the universe. Nothing in nature suggests that life is disorderly or formless. The word "universe" means "one order." If life has form, then we must not reject the probability that human progress, which is part of the reality of life, also has order and form. By extension, the stock market, which values man's productive enterprise, will have order and form as well. All technical approaches to understanding the stock market depend on the basic principle of order and form. Elliott's theory, however, goes beyond all others. It postulates that no matter how minute or how large the form, the basic design remains constant.
((9.2 Conceptual Phi, "Elliott Wave Lessons 10"))

Phi (1of3)

The value of this ubiquitous phenomenon was deeply understood and profoundly appreciated by the greatest intellects of the ages. History abounds with examples of exceptionally learned men who held a special fascination for this mathematical formulation. Pythagoras chose the five-pointed star, in which every segment is in golden ratio to the next smaller segment, as the symbol of his Order; celebrated 17th century mathematician Jacob Bernoulli had the Golden Spiral etched into his headstone; Isaac Newton had the same spiral carved on the headboard of his bed (owned today by the Gravity Foundation, New Boston, NH). The earliest known aficionados were the architects of the Gizeh pyramid in Egypt, who recorded the knowledge of phi in its construction nearly 5000 years ago. Egyptian engineers consciously incorporated the Golden Ratio in the Great Pyramid by giving its faces a slope height equal to 1.618 times half its base, so that the vertical height of the pyramid is at the same time the square root of 1.618 times half its base. According to Peter Tompkins, author of Secrets of the Great Pyramid (Harper & Row, 1971), "This relation shows Herodotus' report to be indeed correct, in that the square of the height of the pyramid is √φ x √φ = φ, and the areas of the face 1 x φ = φ." Furthermore, using these proportions, the Egyptian scientists (apparently in order to build a scale model of the Northern Hemisphere) used pi and phi in an approach so mathematically sophisticated that it accomplished the feat of squaring the circle and cubing the sphere (i.e., making them of equal area and volume), a feat which was not duplicated for well over four thousand years. why, all we have is conjecture from a few authors. Yet that conjecture, however obtuse, curiously pertains to our own observations. It has been surmised that the Great Pyramid, for centuries after it was built, was used as a temple of initiation for those who proved themselves worthy of understanding the great universal secrets. Only those who could rise above the crude acceptance of things as they seemed to discover what, in actuality, they were, could be instructed in "the mysteries," i.e., the complex truths of eternal order and growth. Did such "mysteries" include phi? Tompkins explains, "The pharaonic Egyptians, says Schwaller de Lubicz, considered phi not as a number, but as a symbol of the creative function, or of reproduction in an endless series. To them it represented `the fire of life, the male action of sperm, the logos [referenced in] the gospel of St. John.'" Logos, a Greek word, was defined variously by Heraclitus and subsequent pagan, Jewish and Christian philosophers as meaning the rational order of the universe, an immanent natural law, a life-giving force hidden within things, the universal structural force governing and permeating the world.
While the mere mention of the Great Pyramid may serve as an engraved invitation to skepticism (perhaps for good reason), keep in mind that its form reflects the same fascination held by pillars of Western scientific, mathematical, artistic and philosophic thought, including Plato, Pythagoras, Bernoulli, Kepler, DaVinci and Newton. Those who designed and built the pyramid were likewise demonstrably brilliant scientists, astronomers, mathematicians and engineers. Clearly they wanted to enshrine for millennia the Golden Ratio as something of transcendent importance. That such a caliber of people, who were later joined by some of the greatest minds of Greece and the Enlightenment in their fascination for this ratio, undertook this task is itself important. As for
((9.1 The Meaning of Phi, "Elliott Wave Lessons 10"))